Venture capital firms are backing litigation worth up to £1bn against major banks over the alleged misselling of interest rate hedging contracts, the Gazette can reveal.

A group of cases identified by the company that has secured the backing of funds for the claims, Norton Accord, would represent the largest set of funded claims faced by UK banks to date. This group of cases could dwarf previous high-profile customer claims covering Europe, such as the £100m international settlement reached by Virgin and BA in the 2008 fuel surcharge case.

The Gazette understands that claims will be filed shortly. Claims will average £2m-£4m, placing them in a value range that the Financial Services Ombudsman has said it is reluctant to adjudicate on. The estimated length of the litigation is 12-18 months.

Hedging contracts became a common precondition for high-street bank loans to small and medium-sized businesses from at least as far back as 2005. The ‘swap’, a product that effectively fixed interest paid, was a form of insurance against interest rate rises. But with interest rates falling, many borrowers were trapped on a higher rate by the product.

Paul Crawford, director of Norton Accord, told the Gazette: ‘Our research indicates that there are 4,000 possible claims suitable for funding using this format.’

Based on counsel’s opinion and Norton Accord’s own research, Crawford estimated that clients could recover 80-90% of their losses. The litigation is backed by three sources, Crawford said. Two were funds with an international focus. The third backs only cases involving UK solicitors. Norton Accord is working with seven law firms including London firm Bracewell Law.

Norton Accord is also considering what pensions-related claims could be suitable for funded claims, and is developing options for divorce cases.